Weekly Market Outlook: Stick With the Trend

 |  Includes: QQQ, SPY, VXX
by: Price Headley, CFA

Amazingly, the market managed to pull a gain back out of the bears' jaws. Oh, it was an ugly win, only slipping back into the black late in the day on Friday. A gain is a gain is a gain though.... the seventh winning week of the last eight. The question is, is an eighth win in the cards?

As always, we've got some thoughts on the matter below for option trading. Before painting that near-term picture though, let's slice and dice the economy.

Economic Calendar

If we had to grade the economy based on last week's news, we'd have to give it a C-.

Industrial production and capacity utilization both slipped. It wasn't by a lot, and certainly doesn't change the overall trend direction of that data. All big trends start as small trends though. That said, this set of data dies not yet merit a sounding of the alarm bell.

Nor does the building permit number; it fell from 571K to 539K in September, despite the increase in housing starts, from 608K to 610K. As we've mentioned before, this is the time of the year that those numbers start to sink anyway. The longer-term (multi-year) trend is still showing net improvement.

As for unemployment claims, both numbers fell, by a little. That continues to be tepidly good news, though each has been in a very mild downtrend for months anyway. Until new claims fall - and stay - under the 440K level (versus last week's 452K), investors are apt to take even good news on this front with a grain of salt. Don't be fooled though... there is a light at the end of this tunnel.

Here's the whole data set:

Last Week's Economic Numbers

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As for the coming week, more is in store right off the bat, particularly for the real estate market.

Existing home sales for last month will be unveiled on Monday; look for a slight increase to 4.25 million. Those homes should also have sold for a little higher price, according to the Case-Shiller Index - it's expected to be up by 2.0% (versus the 3.2% increase in the prior months. The FHFA Home Price index will somewhat verify the Case-Shiller number on Wednesday, though keep in mind the FHFA price index is looking at August's data. New home sales will be announced on Wednesday; the pros are looking for a slight improvement, to 295K. Mortgage application numbers will also be unveiled on Wednesday. Hopefully it will be stronger than last month's 10.5% decline.

Needless to say, it's going to be a wild week for real estate watchers.

At the same time, it will be an important week on the confidence front. The Conference Board's consumer confidence figure will be out on Tuesday, and is currently expected to be slightly higher than last month's tumble to 48.5. The Michigan Sentiment Index will follow that on Friday, which is expected to show an even more tepid improvement, to 68.0.

A few other data nuggets will be posted as well; check it out:

This Week's Economic Numbers

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S&P 500

One thing is undeniable - the bulls' momentum. It's what you can't see under the surface that's so troubling. Let's just go through the pros and cons we're seeing for the SPX (SPX) (NYSEARCA:SPY), one at a time.

What's Bullish:

  1. Remember the floor at 21.50 we mentioned the VIX (NYSEARCA:VXX) (QQQQ) needed to break under for the bulls to get traction? Yeah, well, not only has the VIX moved under it, it tested that floor as a ceiling last week, and was pushed down again.
  2. Momentum; seven winning weeks in the last eight. Enough said.
  3. This is the time of year when stocks tend to take off anyway; whether they're "worth it" or not is largely irrelevant.

What's Bearish:

  1. Despite the advance, not only has the bullish volume never been all that strong, it's actually getting weaker.
  2. We're now up 13.8% from the early September low. That's not an unheard-of uninterrupted run, but it's definitely up there. As such, stocks are well overbought and ripe for a pullback.
  3. A MACD crossunder. The fact that this one took shape at such an elevated level makes the risk that much greater.

As they say, the trend is your friend... until it isn't. As unbelievable as it may seem, the right move here is to side with the trend until it's clear the bears are taking over. That should be as simple as a move under the 20-day moving average line, currently at 1162. The VIX getting above 21.50 will be an ancillary clue.

Bear in mind these are all daily chart perspectives though.

S&P 500


Sector Performance

From worst to best in one week flat. That's the financial sector right now... on top of the pile this week after finding itself at the bottom last week. Given the group's weak performance over the last several months though, this revival could last quite a while longer - especially now that we're seeing some key earnings beats. And just for the record, the financial sector is also expected to show the biggest year-over-year improvement in income.

At the other end of the scale you'll find gold... for the second week in a row. Is it a dollar-based move? Mostly, though even if it wasn't, the fact that these stocks are the year-to-date winners still leaves them amazingly vulnerable right now for options trading.

As for other sectors, we're seeing more rotation than not right now, meaning most of what was hot now isn't, and vice versa.

Sector Rank, One Week

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Earnings Calendar

Dizzy yet? Hold onto your hats, because this week's earnings announcements are even more numerous than last week's. After this week though, it should be easier to keep tabs on them all (though not leaps and bounds easier yet). Here's what's coming this week:

Earnings Calendar


Disclosure: No positions